It’s common to have lots of questions when reviewing the final settlement sheet of a real estate transaction. Whether you’re buying or selling a house, there are plenty of fees that aren’t straight forward. Have you ever asked yourself what an assignment fee in real estate is? This line item can come as a surprise to buyers and sellers preparing to close on a property – especially to those who didn’t know a wholesaler was involved in their deal.
Let’s uncover all that you’ll need to know about what an assignment fee in a real estate transaction is.
Definition of a Real Estate Assignment Fee
A real estate assignment fee is the difference between the original contracted price of an off-market transaction and the final sale price. An assignor – typically a real estate wholesaler – connects a seller and buyer, both at different prices. Once the deal closes, the assignment fee is the wholesaler’s cut for helping facilitate the transaction.
How Does an Assignment Fee Work?
An investor (let’s call them Investor A) agrees to buy a property at a particular price. Then they find another buyer (Investor B) willing to purchase it at a higher price before the original sale closes. The difference, or the ‘assignment fee,’ is what Investor A pockets. It’s like being a matchmaker but for houses and profits.
Example of an Assignment Fee
Investor A gets a property under contract to buy for $100,000. He (or she) then contacts Investor B about the deal because Investor A knows that Investor B loves these types of properties. Investor B agrees to pay $105,000 for the property. Investor A assigns the rights of the original purchase agreement (contract) to Investor B before closing. Then, Investor A gets paid $5,000 as the assignment fee once it closes and Investor B gets the property.
Difference Between Assignment Fees and Commissions
An assignment fee is essentially a finder’s fee for an off-market real estate deal. It’s common to see these fees when someone is trying to wholesale a house. What is the main difference? The wholesaler isn’t really representing anyone besides themself. Their goal is to get the seller to agree to one price, and then find a buyer that will agree on a slightly higher price.
These are different than real estate agent commissions. A deal that involves an assignment fee takes place outside of the MLS (off-market). It’s common to see these on fixer-upper properties that are being purchased by real estate investors.
The Role of an Assignment Fee
Picture property flipping as a relay race. The assignment fee is the baton. The baton is passed from the property from the original buyer (who might have cold feet or a change of heart) to a new buyer, ready to sprint to the finish line.
Assignment fees in real estate are most commonly seen when investors buy distressed properties. For example, a company that buys houses as-is will likely target fixer-uppers. They will work directly with wholesalers, who will try to find them these types of homes.
Wholesalers Role in Assigning Properties
Wholesalers then reach out directly to homeowners, seeing if they’re interested in selling. Oftentimes, when a property suffers from serious damage and is hardly livable, listing it on the market isn’t the best option. Traditional buyers will try to purchase it using a mortgage and the loan will get denied because of the condition of the house. That’s why it’s more common to see fixer-upper properties sold off-market by wholesalers who take an assignment fee once they connect the dots.
Who Pays the Assignment Fee?
In the dance of real estate, the one who takes the final bow (the end buyer, or Investor B) pays the assignment fee. Think of it as a finder’s fee for finding a good deal. Real estate investors are willing to pay more for a property knowing that there’s an assignment fee baked into the price if that means securing a solid deal. Especially in competitive real estate markets where good deals are hard to come by, assignment fees paid by real estate investors are common.
Average Wholesaler Assignment Fee
Talking numbers, assignment fees can vary drastically. They range from a few thousand bucks to the price of a luxury car, depending on the deal’s size and the property’s value. On average, an assignment fee can range between $5,000 and $10,000 per deal.
In smaller cities where home values are low, assignment fees will be lower. On the flip side, larger cities like San Diego CA will experience larger assignment fees (and realtor commissions) because of the home prices. For example, if someone is wholesaling a large countryside home in California, the assignment fee could be as big as the land itself.
Are Assignment Fees Taxable?
Ah, taxes—the plot twist no one likes. Yes, assignment fees are taxable. They’re income, after all. Uncle Sam considers these fees as earnings, so they must be reported. Similar to real estate commissions, taxes must be paid on these.
Strategies for Negotiating Assignment Fees with Investors
Negotiating assignment fees is part art, part science, and all hustle. It’s like haggling at a flea market—you want the best deal without scaring off the seller. Start by knowing your worth and the property’s value.
Be transparent but firm, and always, always be ready to walk away. Remember, the goal is to find a win-win where both you and the investor skip away happy. Sometimes, throwing in a sweetener, like offering to handle some paperwork, can seal the deal.
Real Estate Assignment Fees
In conclusion, assignment fees are the secret sauce in many real estate deals. These fees offer a way for investors to profit without getting their hands dirty. Understanding how they work, who pays them, and how to negotiate them can turn you from a real estate newbie into a savvy investor. From the investor’s perspective, it can be worth paying an assignment fee to secure a great piece of real estate.